Interest coverage ratio
In one sentenceEarnings before interest and taxes divided by interest expense, showing how many times operating profit covers the interest due on loans.
Simply put
Before lending to you, the bank asks: is your profit enough to pay the interest comfortably? Coverage of two times means profit could fall by half and you would still be able to pay the interest.
If it gets close to 1, almost all operating profit goes to interest, and any drop in sales puts you at a loss.
Worked example
A distribution business made earnings before interest and Zakat of 300,000 SAR, and paid loan interest of 60,000 SAR.
Earnings before interest and taxes (EBIT)300,000 SAR
Interest expense60,000 SAR
Coverage = 300,000 ÷ 60,0005 times
Formula: Earnings before interest and taxes ÷ interest expense
Don't confuse it with
Debt ratioThe debt ratio measures the size of the debt from the statement of financial position, and coverage measures the ability to pay its interest from the income statement.